Most taxpayers generally have a negative impression of the process for seeking VAT refunds, whether from personal experience or from word of mouth. Some dread the many requirements that need to be prepared, as well as the challenges of having to file the claim, monitor its slow movement, and hurdle the strict scrutiny of BIR examiners. Others believe that the chances of winning approval are slim, and may just attract further scrutiny from the Bureau of Internal Revenue (BIR). For many taxpayers, the burdensome experience has discouraged them from pursuing repeat claims.
Our lawmakers enacted the TRAIN law to address various tax issues, including institutionalizing an efficient VAT refund mechanism. The BIR then followed suit by issuing rules and regulations that streamlined the review process for refunds, which in part trimmed down the documentary requirements to support a claim. With these changes, many taxpayers were hopeful that the refund process would be eased.
However, with denial of claims still a recurring topic of conversation, taxpayers ask themselves: is it really worth pursuing?
THE COMPLEXITY OF VAT REFUNDS: WHAT HAPPENS IN THE BACKGROUND
Tax refunds are complicated. Specifically for VAT refunds, claimants are faced with the pressure of being able to prepare the application package before a prescribed deadline. The package should be complete and accurate as they will undergo rigorous review by the BIR. True to its billing as a “mandatory audit,” the review is conducted every single time to cover all submissions. If the package is found to be lacking or non-compliant, the claim likely ends up in a denial, or worse, may trigger in the issuance of a letter of authority to formalize an assessment.
The preparation alone can be daunting. Companies will usually designate a point person or team, typically within the finance or tax function, to retrieve records, sort them out, and prepare corresponding schedules in a timebound manner. The investment in time and effort will be significant, particularly if the same person or team also needs to handle equally important day-to-day functions while preparing the application.
Filing the claim is an experience in itself. For reasons attributable to delayed preparation, companies almost always find themselves filing claims at or near the deadline. Often, the stress of rushing to the BIR for a routine “checklisting” prior to being stamped “received” can be a struggle, especially when the claim is refused acceptance for being incomplete. Time management and planning are crucial, although often, this just adds to the pressure of preparation.
The difficult part is not even in the filing, but in the monitoring. After filing, the company, through its point person or team, needs to monitor the BIR’s review process, and this is possible only by way of effective coordination with the assigned BIR examiners and reviewers. From experience, the BIR can pose questions around the claim, which the company needs to quickly address or risk summary denial of the application. Questions can vary from legal basis to additional documentary support. By law, refunds are strictly construed against the taxpayer, and with this, the importance of addressing questions that cast doubt on the claim’s validity cannot be over emphasized.
The VAT refund process is time-consuming and requires significant expense and effort — with no guarantee of return. Because of this, decision makers often have to make a tough choice between pursuing or forgoing their claims.
In this situation, determining the best option for the company is never easy. Some would attempt to identify and quantify the possible risks, and then proceed to assess whether the possible grant of claim is adequate to compensate. Striking a balance between risk and reward, therefore, becomes vital particularly when the risks are outweighed by the rewards. However, the real issue lies in defining what “reward” really means. Is it simply the refundable amount, or can it be some other potential that can be unlocked in the process?
In one of the breakout sessions in the recently concluded 1st SGV Tax Symposium held on Aug. 19, one of our authors delivered a presentation, “Balancing Risks and Rewards in VAT Refund Claims.” The main goal of the session was to get the message across that companies need to consider the balance of risk and reward, where risks are lowered by means of active preparation, and rewards are increased as a necessary consequence of the exercise. The rewards take the form of a grant or a seal of overall tax compliance.
LOWERING THE RISKS
Active preparation is very critical to the success of any VAT refund claim. In an ideal world, companies should strive to be proactively VAT refund-ready at all times. This can be done by developing and maintaining a well-organized record-retention system where relevant documents can be quickly and easily retrieved for package preparation. They can also conduct internal reviews to examine current levels of compliance and try to improve them by way of process improvement and suggested remediation. This exercise, incidentally, helps companies identify issues, giving them a preview of the actual refund process, and an opportunity to simulate and strategize for better ways to address issues raised in the process.
To ease the burdens and demands required by the refund process on the persons tasked with preparation, companies can also explore outsourcing the task to tax experts who specialize in handling claims. The outsourced tasks are usually designed to be end-to-end to cover internal review, preparation of the refund package, filing, and monitoring. Having the guidance of tax experts also helps keep internal teams abreast of relevant laws, rules and regulations, and the current position of the BIR on certain issues. The interaction with tax experts inevitably leads to an overall improvement in internal teams, an investment in resources that lowers the companies’ risks over time.
INCREASING THE REWARDS
It must be stressed that choosing to lower the risks by active preparation already tilts the balance in favor of successful refunds. By being VAT refund-ready, companies are likely able to resolve potential issues even before they ripen into real ones during the BIR’s review. Companies also get a better shot at presenting a complete set of documents and attending to inquiries that may be raised during the review. While companies envision the refund as the instant reward, they should also recognize that improved overall tax compliance will redound to more value for the company in the long term.
THE FUTURE OF VAT REFUNDS
The BIR is already actively promoting the implementation of its digital transformation program through its new Electronic Invoicing System (EIS). With digitalization, stakeholders can look forward to a simplified VAT refund process, hopefully doing away with the need to submit voluminous hard copies of invoices and official receipts. The potential for a simplified process should make refunds more attractive to taxpayers. Digitalization is a change in process enabled by technology. It can be a complementary solution to easing the usual refund concerns relating to proper substantiation and adequate presentation.
The recent granting by the BIR of VAT refund claims is certainly encouraging news and tax experts hope that it is a precursor of more refunds to come. Yet, while encouraging, this does not change the fact that the BIR will continue to adhere to the strict review guidelines required by law. More than ever, companies that intend to file refund claims should ensure that they are VAT-refund ready at all times, both to improve their chances as well as enhance their level of tax compliance. After all, as Benjamin Franklin once said, “failing to prepare is preparing to fail.”
This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the authors and do not necessarily represent the views of SGV & Co.
Atty. Victor C. De Dios is a tax principal and Josephine Grace R. Sandoval is a tax senior director, respectively, of SGV & Co.